How to become a first-time investor in UK Real Estate?

Becoming a first-time investor in UK real estate is a multi-step process that requires a solid understanding of the legal, financial, and strategic considerations involved.

To help navigate the process Charlie Hewlett, Sophie Henwood and Will Timbrell outline the key stages involved in acquiring your first investment property – from choosing the right investment vehicle to securing finance, understanding the legal timeline, and managing your property effectively.

Appointing a Buying Agent

A buying agent will act as your representative throughout the acquisition process. Their responsibilities include:

• Identifying properties that match your criteria.
• Offering insights into the market and property values.
• Arranging property viewings.
• Negotiating on your behalf to secure the best price and terms.

They are typically compensated as a percentage of the property purchase price once the deal closes.

Appoint Solicitors

Your solicitor will handle the legal side of the property acquisition, including:

• Reviewing the sale contract and associated documents.
• Conducting necessary legal due diligence.
• Ensuring the transaction complies with UK law.
• Overseeing the completion process. It’s important to choose a solicitor familiar with real estate transactions as they will also need to coordinate with the buyer’s legal team and support the smooth execution of the deal.

Identifying the Right Investment Vehicle

You will need to decide the best structure for purchasing the property. The best structure will depend on a few factors, including tax, the involvement of third parties and your wider investment goals.

Buying in Your Personal Name:

• This is often the simplest way ahead, but does mean that any liabilities relating ownership of the property (e.g. finance costs) sit with you personally and therefore outside of the limited liability protection associated with companies.

• This route also may not be appropriate particularly where multiple investors are involved and gives less flexibility on sale (where it may be more tax efficient for a buyer to buy a company rather than the underlying property)
• You will pay stamp duty land tax (SDLT), with rates potentially up to 19% depending on the type of property.
• Rental income will be subject to income tax (up to 45%), and capital gains tax would likely be payable on the profits from disposal (up to 28%).
• The property value will be part of your estate for inheritance tax purposes.

Incorporating a Company to Buy the Property (i.e. a special purpose vehicle (SPV)):

• A company can be used for property acquisition, allowing for potentially more favourable tax treatment on rental income and capital gains (corporation tax rates vary).
• Higher SDLT rates apply to residential property purchases by companies (up to 19%).
• There is also a special tax called ‘ATED’ that applies to residential properties owned through companies that are not let out to 3^rd parties on a commercial basis.
• The company can deduct certain expenses more easily than individuals, but you may need to pay corporation tax on profits, and there is a risk of double taxation if the profits are paid out as dividends.
• The property’s value will be included in your estate for inheritance tax purposes.

Buying a Company That Owns a Property:

• Purchasing shares in a company that owns the property rather than the property itself may result in a lower transfer taxes (with stamp duty on the shares in a private company being 0.5%), though additional due diligence is needed to check the company’s liabilities.

Considering Financing Options

How you fund the property purchase is crucial. The main options are as follows:

• Bank debt: this clearly comes with stringent terms and the potential for possession if payments are missed but can be a relatively cheap for finance. Interest on mortgage debt is deductible against rental income.
• Savings (if buying personally)
• Shareholder debt: this can be a flexible way to provide and extract funds. Repayment of debt generally does not result in a tax charge to the provider of the debt.
• Equity (i.e. share subscriptions for companies): this is often limited given that it is less flexible than debt and can be difficult to extract without incurring tax.

Legal Process Timeline

The general transaction timeline for purchasing a property (rather than shares in a company) involves:

• Agreeing heads of terms
• Receiving a sales pack containing essential information like title documents and leases.
• Conducting searches such as local authority and environmental checks (usually taking 4-6 weeks).
• Undertaking surveys to assess the condition of the property (including structural, electrical, and asbestos checks).
• Reviewing the sales pack and searches (The article here details the key issues your solicitor will be concerned with: First Time Investor in Real Estate: Top Five property Law Considerations – Boodle Hatfield)
• Negotiating the contract and legal documentation:
  • Contract for Sale
  • Transfer deed
  • Rent deposit assignments (a rent deposit is a sum of money held by the landlord which can be called upon where the tenant has failed to pay its rent)
  • Arrears assignments
  • Capital allowances election
  • Any third party financing documentation and documentation with co-investors
  • Potentially landlord consents if you are purchasing a leasehold interest
• Exchanging contracts legally binds you to the purchase. You should insure the property from exchange.
• Completion of the sale, where you pay the purchase price and the property is transferred to you.

Property Management

After purchasing the property, you will likely need a managing agent to handle day-to-day management of the property, including:

• Maintenance and repairs.
• Rent collection and chasing arrears.
• Health and safety compliance.
• Insurance and tenant communication. Your managing agent will also help with issues such as tax compliance (e.g., withholding tax on rents if applicable).

VAT Considerations

For non-residential properties, VAT may apply. You could consider opting to tax VAT on the property if you expect significant input tax, which could allow you to reclaim VAT on costs associated with the property.

Final Considerations:

• Ensure that all aspects of the purchase, from financing to tax implications, are carefully planned with expert advice.
• Having the right team of professionals (buying agents, solicitors, managing agents, accountants, insurance brokers) is essential to streamline the acquisition process and ensure a successful investment.

Boodle Hatfield can guide you through the process, ensuring every aspect of the transaction and ongoing management is handled professionally.